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CSE > SEC Filings for CSE > Form 8-K on 20-Dec-2013All Recent SEC Filings

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Form 8-K for CAPITALSOURCE INC


20-Dec-2013

Entry into a Material Definitive Agreement, Termination of a Material Definitiv


Item 1.01. Entry into a Material Definitive Agreement.

On December 20, 2013, CapitalSource Inc., a Delaware corporation ("CapitalSource"), entered into Amendment No. 1 (the "Amendment") to the Agreement and Plan of Merger (the "Merger Agreement"), dated as of July 22, 2013, by and between CapitalSource and PacWest Bancorp, a Delaware corporation ("PacWest"). The Amendment provides for a termination fee of $91 million payable by CapitalSource to PacWest in the event that the Merger Agreement is terminated in certain limited circumstances, and provides for a termination fee of $59 million payable by PacWest to CapitalSource in the event that the Merger Agreement is terminated in certain other limited circumstances. The termination fees payable by each of CapitalSource and PacWest, respectively, are equal to the previously disclosed surrender prices under the PacWest Stock Option Agreement and the CapitalSource Stock Option Agreement (each as defined below), respectively. The Amendment was entered into pursuant to the terms of the Memorandum of Understanding (as defined below) entered into by CapitalSource, PacWest and the plaintiffs in the previously disclosed putative stockholder class action lawsuits (the "Plaintiffs"). The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Amendment, which is filed as Exhibit 2.1 hereto and is incorporated herein by reference.



Item 1.02. Termination of a Material Definitive Agreement.

On December 20, 2013, as part of the Amendment and pursuant to the Memorandum of Understanding, CapitalSource and PacWest agreed to terminate (the "Stock Option Terminations"), without penalty to either party, (i) the CapitalSource Stock Option Agreement, dated as of July 22, 2013, between PacWest and CapitalSource (the "CapitalSource Stock Option Agreement") and (ii) the PacWest Stock Option Agreement, dated as of July 22, 2013, between CapitalSource and PacWest (the "PacWest Stock Option Agreement", and together with the CapitalSource Stock Option Agreement, the "Stock Option Agreements"), pursuant to which each of CapitalSource and PacWest had granted to the other an option (the "Option") to purchase shares representing up to 19.9% of the granting party's total outstanding shares before giving effect to the exercise of the Option. Prior to the termination of the Stock Option Agreements, neither Option had become exercisable. The foregoing description of the Stock Option Agreements does not purport to be complete and is qualified in its entirety by reference to the Stock Option Agreements, which are described in CapitalSource's Current Report on Form 8-K filed on July 26, 2013, which description is incorporated herein by reference.



Item 8.01. Other Events.

On December 20, 2013, CapitalSource and PacWest entered into a memorandum of understanding with the Plaintiffs (the "Memorandum of Understanding") regarding the settlement of certain litigation relating to the Merger Agreement. Pursuant to the Memorandum of Understanding, CapitalSource and PacWest have agreed to enter into the Amendment, including the Stock Option Terminations provided for therein, and to make certain supplemental disclosures to the definitive joint proxy statement (the "Proxy Statement") filed by PacWest and CapitalSource with the United States Securities and Exchange Commission (the "SEC") on December 6, 2013, and first mailed to PacWest's and CapitalSource's stockholders on or about December 11, 2013.


As previously disclosed in the Proxy Statement, since July 24, 2013, 11 putative stockholder class action lawsuits were filed against CapitalSource, PacWest and certain other defendants in connection with the Merger Agreement. Five of the 11 actions were filed in Superior Court of California, Los Angeles County:
(1) Engel v. CapitalSource Inc. et al., Case No. BC516267, filed on July 24, 2013; (2) Miller v. Fremder et al., Case No. BC516590, filed on July 29, 2013;
(3) Basu v. CapitalSource Inc. et al., Case No. BC516775, filed on July 31, 2013; (4) Holliday v. PacWest Bancorp et al., Case No. BC517209, filed on August 5, 2013; and (5) Iron Workers Mid-South Pension Fund v. CapitalSource Inc. et al., Case No. BC517698, filed on August 8, 2013, referred to as the California actions. The other six actions were filed in the Court of Chancery of the State of Delaware: (1) Fosket v. Byrnes et al., Case No. 8765, filed on August 1, 2013; (2) Bennett v. CapitalSource Inc. et al., Case No. 8770, filed on August 2, 2013; (3) Chalfant v. CapitalSource Inc. et al., Case No. 8777, filed on August 6, 2013; (4) Oliveira v. CapitalSource Inc. et al., Case No. 8779, filed on August 7, 2013; (5) Desai v. CapitalSource Inc. et al., Case No. 8804, filed on August 13, 2013; and (6) Fattore v. CapitalSource Inc. et al., Case No. 8927, filed on September 19, 2013, referred to as the Delaware actions.

On August 15, 2013, the Delaware actions were consolidated into a single action, captioned In re CapitalSource Inc. Stockholder Litigation, Consol. C.A. No. 8765-CS, and assigned to Chancellor Leo E. Strine. On September 25, 2013, plaintiffs in the Delaware actions filed a Verified Consolidated Amended Class Action Complaint, referred to as the Delaware consolidated complaint. On September 17, 2013, the California actions were consolidated into a single action, captioned In re CapitalSource Inc. Shareholder Litigation, Lead Case No. BC516267, and assigned to Judge Elihu M. Berle. On October 2, 2013, plaintiffs in the California actions filed an Amended Consolidated Complaint, referred to as the California consolidated complaint.

The Delaware consolidated complaint and the California consolidated complaint each allege that the members of the CapitalSource board of directors breached their fiduciary duties to CapitalSource stockholders by approving the proposed merger for inadequate consideration; approving the transaction in order to obtain benefits not equally shared by other CapitalSource stockholders; entering into the merger agreement containing preclusive deal protection devices; failing to take steps to maximize the value to be paid to the CapitalSource stockholders; and failing to disclose material information regarding the proposed transaction. The Delaware consolidated complaint and the California consolidated complaint also each allege claims against CapitalSource and PacWest for aiding and abetting these alleged breaches of fiduciary duties. Plaintiffs in these actions seek, among other things, declaratory and injunctive relief concerning the alleged breaches of fiduciary duties, injunctive relief prohibiting consummation of the merger, rescission, an accounting by defendants, damages and attorneys' fees and costs, and other and further relief.

PacWest and CapitalSource and the other defendants named in the Delaware consolidated complaint and the California consolidated complaint deny each of the allegations therein and believe that the Proxy Statement is accurate and complete in all material respects and that no further disclosure or other action is required under applicable laws. However, to avoid the risk that the lawsuits may delay or otherwise adversely affect the consummation of the merger and to minimize the expense and burden of defending such actions, PacWest and CapitalSource have


agreed, pursuant to the terms of the Memorandum of Understanding with the Plaintiffs, to enter into the Amendment, including the Stock Option Terminations provided for therein, and to make certain supplemental disclosures related to the proposed merger, all of which are set forth below. The proposed settlement is subject to, among other things, approval of the Court of Chancery of the State of Delaware. Under the terms of the proposed settlement, following final Court approval, each of the Delaware actions and each of the California actions will be dismissed with prejudice. There can be no assurances, however, that the parties will ultimately enter into a stipulation of settlement or that Court approval of the settlement will be obtained. In such event, the proposed settlement as contemplated by the Memorandum of Understanding may be terminated.

SUPPLEMENTAL DISCLOSURES

The following information supplements the Proxy Statement and should be read in conjunction with the Proxy Statement, which should be read in its entirety. All page references in the information below are to pages in the Proxy Statement, and terms used below have the meanings set forth in the Proxy Statement, unless otherwise defined below. Without admitting in any way that the disclosures below are material or otherwise required by law, CapitalSource and PacWest make the following supplemental disclosures:

The following disclosure supplements and restates the third paragraph on page 69 under the heading "Opinion of CapitalSource's Financial Advisor-CapitalSource Public Trading Multiples Analysis".

In the case of CIT Group, Inc., J.P. Morgan adjusted Price / 2014E EPS for capital in excess of a 12% ratio of Tier 1 common capital to risk-weighted assets. Results of the analysis were presented for the selected companies, as indicated in the following table:

                    Selected    Selected    Selected    Selected
                    Companies   Companies   Companies   Companies
                     Median       Mean        High         Low      CapitalSource
Price / 2014E EPS        15.0 x      15.3 x      22.1 x       9.6 x          14.6 x
Price / TBV              1.83 x      1.89 x      2.58 x      1.20 x          1.41 x

The following disclosure supplements and restates the fourth paragraph on page 69 under the heading "Opinion of CapitalSource's Financial Advisor-CapitalSource Public Trading Multiples Analysis".

J.P. Morgan also performed a regression analysis to review, for the comparable companies identified above, the relationship between (i) Price / TBV and
(ii) the 2014 estimated return on average tangible common equity based on available estimates obtained from SNL Financial and FactSet Research Systems. The regression analysis resulted in a slope of 16.53 and an R-squared of 71.35%. Based on this analysis, J.P. Morgan derived a reference range for the implied Price / TBV multiple of CapitalSource common stock of 1.55x to 1.88x.


The following disclosure is added following the first sentence of the fifth paragraph on page 69 under the heading "Opinion of CapitalSource's Financial Advisor-CapitalSource Public Trading Multiples Analysis".

J.P. Morgan used an assumed 12% ratio of Tier 1 common capital to risk-weighted assets based on discussions with and at the direction of CapitalSource management and the CapitalSource board of directors.

The following disclosure is added as a new paragraph following the first full paragraph on page 70 under the heading "Opinion of CapitalSource's Financial Advisor-CapitalSource Dividend Discount Analysis".

The forecasts used by J.P. Morgan at the direction of CapitalSource management for purposes of the foregoing assumptions assumed that CapitalSource would become a registered bank holding company. In addition, based on direction from CapitalSource management, CapitalSource's deferred tax assets were included in Tier 1 common capital to the extent permitted under applicable regulatory requirements.

The following disclosure supplements and restates the last full paragraph on page 71 and the succeeding paragraph under the heading "Opinion of CapitalSource's Financial Advisor-PacWest Public Trading Multiples Analysis".

Results of the analysis were presented for the selected companies, as indicated in the following table:

                    Selected    Selected    Selected    Selected
                    Companies   Companies   Companies   Companies
                     Median       Mean        High         Low      PacWest
Price / 2014E EPS        15.3 x      15.2 x      16.6 x      13.7 x    14.9 x
Price / TBV              2.06 x      2.07 x      2.55 x      1.57 x    2.58 x

J.P. Morgan also performed a regression analysis to review, for the comparable companies identified above, the relationship between (i) Price / TBV and
(ii) the 2014 estimated return on average tangible common equity based on available estimates obtained from SNL Financial and FactSet Research Systems. The regression analysis resulted in a slope of 15.67 and an R-squared of 82.18%. Based on this analysis, J.P. Morgan derived a reference range for the implied Price / TBV multiple of PacWest common stock of 2.44x to 2.75x.

The following disclosure supplements and restates the last two full paragraphs on page 90 under the heading "Interests of PacWest Directors and Executive Officers in the Merger-Interests of John M. Eggemeyer III".

John M. Eggemeyer III, the chairman of PacWest's board of directors and who will become chairman of the board of directors of the combined company at the effective time, is also the chief executive officer of Castle Creek Financial, LLC, referred to as Castle Creek Financial. Pursuant to an agreement, dated May 18, 2011, referred to as the Castle Creek contract, PacWest retained Castle Creek Financial as its financial advisor. PacWest will pay Castle Creek Financial a fee upon the consummation of the merger.

Castle Creek Financial performed various customary financial advisory services for PacWest in connection with entering into the merger agreement, including assisting PacWest in structuring the financial aspects of the transaction, financial modeling and statistical analysis and


negotiating the financial terms of the merger agreement. In the event of an acquisition of a financial institution by PacWest for greater than $20 million, the Castle Creek contract provides for a fee of $200,000 plus 0.65% of the amount of the transaction value in excess of $20 million, subject to reduction for certain expenses. Castle Creek Financial is also entitled to reimbursement of its reasonable expenses incurred on behalf of PacWest. Pursuant to the engagement letter and further discussions between the parties, the fee payable by PacWest to Castle Creek Financial has been reduced to $9 million which will be paid at the closing of the merger.

In connection with PacWest's acquisition of FCAL in 2013 and PacWest's acquisition of American Perspective Bank in 2012, Castle Creek Financial performed financial advisory services for PacWest for which PacWest paid Castle Creek Financial a fee of approximately $1.3 million for the FCAL acquisition and a fee of $447,650 for the American Perspective Bank acquisition, in each case pursuant to the Castle Creek contract. During 2012 and 2013, Castle Creek Financial and its affiliates have not provided any financial advisory or related services to CapitalSource.

Forward-Looking Statements

. . .



Item 9.01. Financial Statements and Exhibits.

(d)                 Exhibits.  The following exhibits are being filed herewith:



Exhibit No.                                 Description

2.1            Amendment No. 1 to Agreement and Plan of Merger, dated as of
               December 20, 2013, by and between PacWest Bancorp and CapitalSource
               Inc.


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